German business confidence has improved for the fourth consecutive month, raising hopes that an economic recovery is on the way.

The Munich-based Ifo institute said yesterday that its main index rose to 90.8 in August from 89.3, thanks to increased confidence of business managers.

"The new survey data underline the Ifo forecast for an economic recovery in the second half of the year," said Mr Hans-Werner Sinn, president of the Ifo.

The Ifo forecast last month said a recovery would be noticeable later this year or early next year, but also said that Berlin was highly likely to breach the EU budget deficit guidelines in 2004 for the third year running.

"Unlike other months, the improvement was not just limited to expectations for the next six months. Assessments of the current situation also improved," according to Mr Sinn.

The index of current business conditions rose to 79.9 points in western Germany, while the expectations component was up at 102.1 from 100.2 the previous month.

However, the gap between actual conditions and future expectations of the 7,000 business managers surveyed by the Ifo is still a cause for concern among German economists, who were cautious about reading too much into the figures, as happened a year ago.

"The expectations component was very high and would signal exuberant growth in the fourth quarter but, looking at the current conditions component, I personally don't believe that will materialise," said Mr Andreas Rees, an economist at Hypovereinsbank. "I'm concerned about the difference between expectations and current conditions, which seems to be widening and shows that expectations are becoming further removed from what's really happening."

Deutsche Bank was equally restrained, saying: "We should remain cautious. Last year, the Ifo rose five times in a row, but the economic recovery did not materialise. In addition, the hard facts do not yet point to a sustained trend towards improvement."

"There is a shimmer of hope but also a big, fat question mark," said Mr Andreas Cors, economic expert at the DIW economic institute.

Despite the pessimism of economists, the continued rise of the closely watched Ifo index will be a welcome boost to the government as it pushes through reforms of the welfare state and the employment market with the economy in its second recession in as many years.

The Ifo index rise comes after the ZEW sentiment index rose for the eighth consecutive month to 52.5 points.